The gold market is a bit lower in early action Friday as traders digest recent upside and risk aversion remains robust. Stocks are not far from the unchanged level and remain close to 12-month lows. Appetite for risk, even on a good day, remains tepid at best as the recession trade is now working its way through global markets. The gold market may require some fresh influences at this point to develop a trend and for the time being prices remain in no man’s land.
Taking an opposite approach to the U.S. Federal Reserve, China overnight cut a key lending rate to boost its declining real estate market. The prime five-year loan rate was cut by a greater than expected .15% in an effort to support growth. The move did provide a little bit of support for stock markets although it could send some mixed signals around the globe about central bank intentions. It may not make much sense, for example, fr the world’s second-largest economy to be cutting rates and easing while the largest economy is attempting to tighten rates aggressively.
The Fed has sent a pretty clear message that it will continue to raise interest rates to combat inflation. After hiking the Fed Funds rate by 50-basis points at its last meeting, the Fed is expected to raise rates by 50-points at its next couple consecutive meetings. There has even been some discussion of a 75-point rate hike, although it seems the odds of such a move are extremely low at this point. As the Fed raises rates to slow the economy, they risk the economy slowing too much and even turning it into a recession.
Worries over recession have been present for some time now. As the Fed holds course and continues with its aggressive policy tightening, those fears may escalate further. Stocks have already begun to feel the bite of recession concern, and the market could move quite a bit lower from current levels if the economy does enter a recession. These concerns are likely to last for some time-at least until the Fed is done hiking-and could fuel additional volatility in the months ahead. That volatility may provide gold with a degree of support as investors desiring to bail on stocks seek out alternatives.
The gold bulls have done a good job, thus far, of absorbing any significant declines in the market. The $1800 level has held so far and may not be breached at all to the downside. The bulls need some help now, however, to get prices moving on a sustainable trajectory higher. Such help could come in the form of the Fed taking a less hawkish approach, new developments in the war in Ukraine or a reversal in the dollar. Whatever the case may be, the bulls will need some fresh inputs to take prices higher and keep them higher at this point.